Texas Appeals Court Says Letter of Intent for Sale of Fiduciary Financial Services of Southwest Stock to Corilant Financial is Not an Enforceable Contract

Reversing a trial jury’s ruling, the Texas Court of Appeals has said that a letter of intent to sell Fiduciary Financial Services of the Southwest, Inc.’s outstanding stock to Corilant Financial, L.P. and Corilant Financial Management, LLC is not an enforceable contract. The appeal’s court ruling also reverses the lower court’s decision to award Corilant more than $1.8 million in would-be purchaser damages, interest, and legal fees.

Corilant filed a breach of contract lawsuit against Fiduciary Financial Services of the Southwest after the latter, a Dallas-based registered investment advisory firm, changed its mind and decided not to sell the company stock to it. Corilant and FFSS Paul Welch had met in April 2006 regarding a potential acquisition.

In May 2007, they signed a letter of intent that included provisions stating that Corilant would pay for legal fees related to the drafting of definitive agreements, the “Definitive Agreements” would be signed as soon as was “practicable,” and the letter of intent was an agreement that was “legally binding and enforceable.” Also, per the letter, there would be earn-out payments for the next five years after closing and Corilant would issue payments equivalent to gross revenues minus 19.1% of gross revenues minus FFSS-borne expenses, “including salaries.”

After Corilant sent drafts of a stock purchase agreement, an employment agreement, and a proxy and voting rights agreement to FFSS, the latter said it wouldn’t sign the agreement and notified Corilant that discussions between both parties were over. Corilant then filed its breach of contract lawsuit against the Texas-based RIA and 10 of its stockholders/employees. A first trial concluded with a hung jury. The lawsuit was retried and that jury ruled in favor of Corilant.

To the Texas appeals court, FFSS brought up 11 issues, including its assertion that the trial court made a mistake when it found that the contract with Corilant to sell 98.5% of FFSS’s outstanding stock was enforceable. FFSS contended that the LOI terms were not definite enough to be enforced.

The appeals court found no evidence that there was a “mutual understanding” on how earn-out payments between the two parties would be structured. The court said the letter lacked specific terms about how the 19.1% earn-out payments would be characterized. While FFFS held the belief that the 19.1% payments were to be considered a management fee and would minimize tax liability, Corilant thought that the 19.1% was a dividend and that FFSS would not be able to deduct it as a management fee.

The appeals court said that seeing as at least one essential term was lacking, per the law it not enforceable. It also said that the management agreement provision, which allows material matters to stay open for future negotiations and modifications for “indefiniteness” cannot be enforced.